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ResMed Inc ltd – Long-Run Strategy

We forecast the company to gain share in the USD 5 billion sleep apnea treatment market as reimbursement becomes increasingly linked to evidence of patient compliance. We expect to see both commercial and national health insurance payers get on the connected device bandwagon, which benefits the duopoly of ResMed and Philips greatly.ResMed’s recent acquisitions of software services platforms for home healthcare practitioners is a new strategic direction and the company has already pieced together approximately 20% share in this USD 1.5 billion market.

Key Investment Considerations

  • ResMed has a strong position in the structurally growing sleep apnea market, where volume growth has been more than sufficient to offset the price deflation headwind.
  • Cash flow is robust with 100% of earnings represented by free cash flow over the preceding five years, a trend we forecast to continue.
  • Risks remain around tax issues as ResMed has been subject to large tax charges in both the U.S. and Australia in the last two years. We are concerned about the reflection on corporate culture and the potential USD 300 million-plus in taxes and penalties payable.
  • ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payers happier to reimburse the cost of respiratory devices.
  • The global sleep apnea market is only 20%-30% penetrated and respiratory device companies are making headway growing volumes around 10% per year, offset by average price deflation of 2%-3%. It is dominated by ResMed and Philips, which together make up an estimated 80% of the USD 5 billion value. ResMed plays a key role in driving diagnosis with its at-home sleep testing devices and ongoing education drive to create awareness of the disease.
  • ResMed has demonstrated a robust top line despite experiencing pricing pressure, and this together with the low financial leverage, leads us to use a below-average cost of equity of 7.5%. This results in a company weighted average cost of capital estimate of 7.4%.
  • The ResMed initiatives to improve sleep apnea diagnosis could result in an acceleration of revenue growth over the next five years. With the sleep apnea market an estimated 50% diagnosed in the U.S. and less in other major markets, the runway for growth is long.
  • Pricing risk for durable medical supplies has played out and pressure could ease going forward resulting in faster top-line growth and expanding margins.
  • The strategic focus on data to support product purchases positions ResMed well to demonstrate the value of its products to the healthcare system.
  • The tax issues that came to light in 2018 could suggest a corporate culture that allows questionable practices in other areas like selling, which is regulated in the U.S.
  • Future cash flows need to fund the total potential historical tax liabilities of USD 300 million over the upcoming years.
  • ResMed is unproven as a software provider, an area it is currently directing a lot of capital to.

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology One Ltd – Critics With Cash Flow Jump

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Since the firm turned profitable in 1992, earnings growth has been impressive, as is the track record of client retention. All this testifies to the quality of the company’s products, the benefits of its consistent research and development spending, and the strength of its staff and management. Critically, the nature of enterprise software and its intricate embedding into clients’ technology infrastructure are such that switching costs are very high, something that Technology One has further enhanced through its end-to-end solutions offering and track record of quality delivery.

Key Investment Considerations

  • Technology One offers enterprise software solutions that are deeply embedded in clients’ information technology, or IT, infrastructure, resulting in high switching costs for users.
  • The company generates revenue from software development and implementation, along with subsequent upgrades and ongoing support, providing revenue resilience and an impressive client retention rate. OAlthough the company operates in a highly competitive industry, its earnings growth track record since turning profitable in 1992 has been exemplary and testifies to the quality of the company’s products and staff.
  • Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet.
  • Technology One’s business model captures value in the entire software development and implementation chain. It develops and markets the software, implements the solution for clients, and offers ongoing subsequent support.
  • The company’s software products are embedded in customers’ business operations, locking in existing clients and underpinning recurring revenue streams in post-sales support and licence fees.
  • Cross-selling opportunities remain, as products taken up per customer are low at three, compared with 12 available in Technology One’s enterprise product suite.
  • Skills shortages in the information technology sector mean the loss of key personnel can be costly, and bidding for talent may drive up labour expense.
  • Development delays with new products and failure to keep pace with technological changes could significantly affect Technology One’s ability to compete in the fast-moving enterprise software industry.
  • Failure of the international expansion strategy in the United Kingdom could dent the company’s longer-term growth profile.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Kellogg Company Benefited From Pandemic-Related Gains

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Kellogg’s dividend growth has been modest over the past five years, at an annualized rate of 2.9%. However, Morningstar analysts anticipate a higher rate going forward: “We forecast Kellogg will raise the shareholder dividend in the mid-single-digit range annually on average during the next 10 years.”

In their Best Ideas report, the analysts made the following case for the stock, which trades at an 18% discount to fair value: “Kellogg has benefited from pandemic-related gains in the retail channel (which drives 90% of its sales) as consumers continue to spend more time at home. Even before the pandemic, we thought Kellogg was taking steps to profitably reignite its top-line trajectory: abandoning direct-store distribution in favor of warehouse delivery, divest-ing noncore fare and stock-keeping units, and upping investments in its manufacturing capabilities and brands.

Although we expect more muted gains over a longer horizon, we think the company is using the current backdrop to sharpen its edge.

“We believe actions to expand its category exposure beyond cereal (with 50% of sales now from on-trend snacks versus 20% from North American cereal) will prop up its sales growth potential longer term. Further, we like the changes to its pack formats to include more on-the-go offerings, which should allow for increased penetration in alternative outlets. We also think recent acquisitions (including smaller, niche startups like RXBAR) afford the opportunity to grease the wheels of Kellogg’s innovation cycle to more nimbly respond to ever-changing consumer trends as they relate to health and wellness and taste.”

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Telstra Corp – Show Off Infrastructure Strength

The strategic intent is taking shape: segregate the AUD 200 million EBITDA-generating InfraCo Towers for potential monetisation (akin to Optus’ current moves to do the same), maintain the optionality of keeping the AUD 1.5 billion EBITDA-generating InfraCo Fixed stand-alone (as NBN mulls its future ownership), and continue refocusing the AUD 5.7 billion EBITDA-generating ServeCo on its transformation to become a more simple, efficient, and digital-centric competitor.

Rather than having investors obsess over the ebbs and flows of Telstra’s near-term earnings still suffering from the margin-crunching impact of NBN and competition, the restructure is likely to shift investor focus to the group’s underlying asset values. We expect a flurry of favourable sum-of-parts asset valuations to hit the market over the coming months, underpinned by the current low-interest rate environment and possibly “inspired” by the lucrative investment banking and advisory fees on offer.

The cloud surrounding Telstra’s near-term earnings is also clearing. Management not only reiterated fiscal 2021 earnings guidance (second-half-weighted and driven by cost-cuts, COVID-19 recovery, mobile earnings growth), but also provided encouraging signs for beyond. Return to underlying EBITDA growth in fiscal 2022 (excluding one-off NBN receipts) and an upgrade to fiscal 2023 return on invested capital, or ROIC, to 8% (from 7%) are all broadly in line with our unchanged estimates. But they are still comforting, especially after the shock of the August update when management (too conservatively) trimmed fiscal 2023 ROIC target to 7%-plus (from 10% previously).

As an illustration of the type of sum-of-parts valuation that investors may see in the coming months, traditional infrastructure entities typically trade at low-to-mid-teen EBITDA multiples. We see no reason why Telstra’s InfraCo Towers and InfraCo Fixed won’t attract similar multiples, given their recurring, predictable and indexed earnings growth (at margins of well over 60%) and likely long-term contracts with Telstra and NBN as anchor tenants. Applying, say, a 12 times multiple to both InfraCo Towers’ fiscal 2020 pro forma AUD 200 million EBITDA and InfraCo Fixed’s AUD 1.5 billion EBITDA, and 8 times to the still-rationalising ServeCo’s AUD 5.7 billion EBITDA produces total enterprise value of AUD 66.0 billion. Subtract AUD 16.8 billion in net debt and one can come up with an asset-based valuation of around AUD 4.10 per share for Telstra. And we are likely to witness much more creative ways to boost this value from the investment community in the future. Our unchanged AUD 3.80 fair value estimate for Telstra will remain based on a discounted cash flow methodology.

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Merck MRK High-Margin Drugs and Vaccines

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Management expects Organon, after it’s spun off in the second quarter, “to pay a meaningful dividend that will be entirely incremental to that of Merck.” It also intends to keep Merck’s payout ratio in the 47%–50% range. Based on consensus earnings for 2021 and 2022, Merck should be able to maintain solid dividend growth while remaining within that range.

“Merck’s combination of a wide lineup of high-margin drugs and vaccines along with a pipeline of new drugs should ensure strong returns on invested capital over the long term. Merck is well positioned to gain further entrenchment in immuno-oncology with Keytruda, which holds a strong first-mover advantage in the large first-line non-small-cell lung cancer market with excellent data. Also, we expect Keytruda to gain ap-provals in early-treatment settings, which should open up underappreciated sales potential.

“Merck’s vaccines look ready to drive further gains, led by human papillomavirus vaccine Gardasil, which continues to generate excellent clinical data. While the firm’s late-stage pipeline lacks several new blockbusters, we expect early-stage assets focused on cancer to move through trials rapidly.

Even though Merck faces some patent losses over the next five years, including diabetes drug Januvia, we expect new drug launches and gains from currently marketed products to more than offset generic competition.

Merck & Co., Inc., d.b.a. Merck Sharp & Dohme outside the United States and Canada, is an American multinational pharmaceutical company headquartered in Kenilworth, New Jersey. It is named after the Merck family, which set up Merck Group in Germany in 1668. Merck & Co. was established as an American affiliate in 1891. 

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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ViacomCBS Poised to Capitalize with Paramount+; International Streaming Expansion Key to Growth

The flagship service offers not only a strong on-demand library from the firm’s deep library but also access to CBS and its wealth of sports rights including the NFL and March Madness which helped to drive streaming growth over the first four months of 2021. With the recent renewal of the Sunday afternoon NFL rights, ViacomCBS now controls two of its most important sports rights into the next decade.

Like its larger peers, Netflix and Disney+, we expect that Paramount+ and Pluto will both benefit from international expansion. While the rebranded flagship service launched in 23 international markets in March including 18 in Latin America, the service has yet to launch in most of Europe, the largest non-U.S. market for Netflix, or India, the biggest international market for Disney+. Given the opportunity internationally and the relatively low guidance of 65-75 million subscribers by 2024, we think it’s likely that management raises the guidance in the next two years similar to the increase that Disney management made in December 2020.

In order to support the streaming growth, we project that ViacomCBS will continue to invest in content creation for the linear networks, theatrical slate, and the streaming platforms. Additionally, we expect that the firm will likely exceed its minimal target of $5 billion in streaming content spending as it ramps local language content to better compete with Disney+ and Netflix around the world. This spending will not help to drive subscription revenue but also ad revenue for both the lower-priced ad-supported tier and Pluto.

ViacomCBS Inc’s Company Profile

ViacomCBS is the recombination of CBS and Viacom that has created a media conglomerate operating around the world. CBS’ television assets include the CBS television network, 28 local TV stations, and 50% of CW, a joint venture between CBS and Time Warner. The company also owns Showtime and Simon & Schuster. Viacom owns several leading cable network properties, including Nickelodeon, MTV, BET, Comedy Central, VH1, CMT, and Paramount. Viacom has also built several online properties on the strength of these brands. Viacom’s Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series.

Source: Morningstar

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Macquarie Group Ltd- Difficult to Flip Assets

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Growth in funds management is delivering lower-risk income, and as the largest manager of infrastructure assets globally, we believe Macquarie is well placed to take advantage of a long pipeline of infrastructure projects across transport and renewable energy expected over the medium-term. While Macquarie is in a sound capital position, impairments in asset financing and lending businesses, as well as on its own equity investments are a potential risk in weaker economic conditions. Timing of asset realisation and market conditions can create lumpiness in earnings, we forecast midcycle returns well above Macquarie’s cost of capital.

Key Investment Consideration

  • The strong earnings outlook is reliant on riding the continued investment in infrastructure and energy assets globally.
  • The global business model, management experience, and strong balance sheet provide flexibility for organic growth and acquisitions, but market fluctuations do cause volatility and can result in loss of capital.
  • Macquarie has avoided large regulatory penalties. While we believe the firm should be given credit for its focus on risk management, the risk of hefty penalties due to error or failure to adequately manage potential risks in the future can be ruled out entirely.
  • Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for sustainable income streams.
  • The expansion into funds management has produced more sustainable, less capital intensive, annuity-style income, which will prevent a GFC-like shock to earnings and return on equity.
  • A focus on niche segments of investment banking allows Macquarie to continue to increase earnings globally.
  • Without the support of falling cash rates it is unlikely Macquarie can continue to achieve double-digit returns in infrastructure, resulting in lower performance fee income.
  • Macquarie invests directly in unlisted assets and businesses, and despite being diversified, a large bankruptcy or asset write-down would still have an impact on group profits.
  • A large investment portfolio makes it more difficult for investors to track and identify issues early.

 (Source: Morningstar)

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Magellan Financial Group – rand to Attract More Funds

While we don’t believe it will be immune from the structural trends of investors moving to passive investments, continuing fierce competition in the active manager industry and major institutions in-housing some of their asset management, we believe it’s better placed than most active managers to address these headwinds. We also think it’s well position to take advantage from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. However, continued strong Performance will remain key.

Key Considerations

  • Magellan Financial Group has a high-profile brand. Increasing superannuation balances supported by Australia’s ageing demographic and compulsory superannuation should expand demand for global exposure, and we believe Magellan is well placed to serve growing retail investor demand.
  • Its established presence in the much larger U.S. and U. K. markets gives Magellan further growth opportunities.
  • A strong balance sheet, operating leverage, low capital demands, and strong free cash flow generation supports a high dividend payout ratio and offers investors the best of both growth and income return.
  • A strong long-term track record in international equities allows Magellan to charge investors a premium management fee and has established the firm as a leader in Australia’s wealth-management industry. Continued strong investment performance of flagship funds should support funds flow.
  • Magellan is well managed and benefits from strong long-term growth prospects resulting from increasing numbers of investors seeking to diversify exposure to international equities with a long-term, high-quality stock focus.
  • Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. give it a stronger growth profile than most domestic peers.
  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should these personnel leave, or should its main funds underperform for a sustained period, fund outflow could increase to material levels.
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents.
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as index type products and ETFs.

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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The Pinnacle at Backing and Growing the Right Horses

This allows Pinnacle to benefit from earnings upside as its affiliate boutiques grow in scale and realise operating leverage. A well-known brand and extensive diversification (across managers, asset classes and client cohorts) strengthen Pinnacle’s ability to attract and hold on to FUM across market cycles. Regardless, capital intensity is higher than pure-play asset managers. Dilution from capital raisings, increasing leverage and deploying capital at low rates of return are risks.

Key Investment Considerations

  • Pinnacle’s reputation as a quality growth partner for high performing boutique managers helps attract high calibre asset managers and investors seeking varied investment solutions. Diversity in asset classes, boutiques, and client cohorts provide stability in FUM growth across market cycles.
  • We anticipate ongoing growth in demand for Pinnacle’s solutions due to the increasingly competitive and regulated funds management landscape.
  • Earnings prospects are strong. Notably, there are upsides from the scaling of fixed costs as affiliate boutiques grow in scale, new money from increased distribution and new boutique additions.

Company Profile

Pinnacle Investment Management Group is an Australian-based multi-affiliate investment management firm. The principal activities of the firm are equity, seed capital and working capital, and providing distribution services, business support, and responsible entity services to a network of boutique asset managers, termed as “affiliates.” Apart from deriving revenue from its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. The business is growing rapidly with number of boutiques and FUM more than doubling to 16 and circa AUD 71 billion in December 2020, respectively, from seven and AUD 23 billion in December 2016.

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Veeva Raises Annual Guidance after First-Quarter Revenue Beat

Commercial Cloud results also benefited from adoption of CRM add-ons, which we see as the fundamental driver of long-term growth for the suite. Vault had a very strong quarter as well, bolstered by its Development Cloud that is composed of an end-to-end stack of modules that integrates different components of the drug development process (clinical, quality, regulatory, safety). The company added a record number of new customers to its Vault Quality suite of offerings. Vault Regulatory and Vault Safety also performed well, adding new customers and expanding adoption of modules among existing customers.

Professional services revenue grew an impressive 38% year over year and despite only composing one fifth of total revenue, contributed to more than half of Veeva’s revenue beat, as demand for Vault R&D services and business consulting was higher than anticipated during the quarter. Management expects service revenue to normalize in the second quarter, as it attributes higher utilization of services to the timing of client project starts. Ultimately, services revenue is more volatile than subscription revenue due to its nature (ad hoc versus SaaS), and we are maintaining our long-term revenue growth estimates for the segment.

Veeva anticipates momentum to carry through the rest of the year and has raised total revenue guidance to a range of $1,815 million-$1,825 million (an increase of $60 million over last quarter’s estimates). Taking this raise into account along with a slight improvement in our short-term operating margin estimates, we are raising our fair value estimate to $305 from $300.

Company Profile

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning, or ERP, systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.